Iran looks for options as the rial tanks and a foreign currency crunch bites

With the Iranian rial collapsing against the US dollar and the country facing a shortage of foreign currency, it is looking at alternatives that include cryptocurrency to enable trade and support its economy. Iran is now teaming up with Russia to launch a new stablecoin — a type of cryptocurrency — which will be backed by gold for cross-border transactions in place of the US dollar, it was reported last week. The countries, both targets of western sanctions, are seeking to boost bilateral trade through the mechanism. “By providing a more stable means of conducting economic transactions and reducing the impact of currency fluctuations on trade, a stablecoin may help two countries increase their trade exchanges,” says Mohammad Farzanegan, professor of Middle East economics at the Centre for Near and Middle Eastern Studies, Philipps-University Marburg in Germany. “Since both countries are also experiencing sanctions, it might be seen as a way to bypass sanctions by using digital currencies. “However, one should note that factors such as the degree of adoption of such types of payments by businesses in both countries, their regulatory framework and stablecoin literacy of economic agents may affect the success of the project.” The technical infrastructure for conducting such transactions may also be a factor in its adaptation on a large scale between the two countries, he adds. But while it may work in Russia, the value of gold does not match the value of the dollar in Iran, which might make its implementation challenging, according to Mohammed Taher Khayami, chief commercial officer of iTeller Dubai, a cryptocurrency payments platform. The rial ebbed to a record low of about 450,000 against the greenback in Iran's unofficial market last weekend, although it has since slightly rebounded, according to the foreign exchange site Bonbast.com . Also, while Tehran has high ambitions for trade with Russia, the latest Iranian customs data suggest that trade has increased only marginally, says Henry Rome, senior fellow at the Washington Institute for Near East Policy. “I am doubtful there are short-term fixes for this, considering the structures of the two economies and financial and transport difficulties.” As both of the countries are energy exporters, there’s not a lot for them to trade, adds Alex Vatanka, director of the Iran Programme at the Middle East Institute and a senior fellow in the Frontier Europe Initiative. “I think fundamentally, there are countries that are more important to Iran — obviously China is the one that buys the bulk of Iran's oil. So that relationship, economically, is much more important now than Iran-Russia relations because that's an issue that could become important in the next few years to come, depending on where they go in their overall policies internationally,” he says. “But they've just started that conversation between Iran and Russia so it's going to take some time to see. With China, you already have Iran's largest oil trade oil importer, and if the Chinese and the Iranians can work things out, that will make a difference.” The main destination for Iranian exports in 2020 was China, with a share of 75 per cent, followed by Turkey (5.4 per cent) and Russia (3.2 per cent). In the same year, China accounted for 31.4 per cent of Iran's total imports, according to the Atlas of Economic Complexity. With the US starting to put pressure on China to reduce its imports of oil from Iran, it remains to be seen what will happen next, Mr Vatanka says. Meanwhile, Iran’s trading relations with its neighbours, including Iraq, are also now being more keenly scrutinised by the US. Earlier this week, Iraq's Prime Minister dismissed the governor of the central bank in an attempt to assuage public anger over a currency crisis that has led to an increase in the prices of goods. The currency crisis comes as the US has been complaining that the dollar is being funnelled to Iran, Syria and Lebanon through a foreign currency auction run by the Central Bank of Iraq. “We've seen in the last few weeks and months, certainly going back to November of last year, the United States coming up with new ways to put pressure on Iraq, to prevent the Iraqi financial sector being used by Iran,” says Mr Vatanka. “This is a new development relatively. So, if the US continues this sort of pressure on countries like Iraq … then it's going to be harder for Iran's neighbours to balance [their ties with the country].” The rial has been declining against the dollar since the outbreak of nationwide protests following the death in police custody of 22-year-old Mahsa Amini on September 16. To address the issue, in December, the Iranian government replaced the governor of the Central Bank of Iran Ali Saleh-Abadi with Mohammad-Reza Farzin, chief executive of Bank Melli Iran. Mr Farzin, who last week blamed the currency’s drop on “psychological operations”, according to state broadcaster Irib, has stressed that the central bank faces no restrictions in terms of foreign currency and gold resources and reserves. However, analysts primarily blame the currency's collapse against the dollar on the political turmoil in the country. Since March 21 last year, the US dollar has appreciated by 72 per cent against the rial, to 450,000 from 262,300, says Mahdi Ghodsi, economist at the Vienna Institute for International Economic Studies. “Political instability is the natural, sole cause of such a huge fall in the rial,” he says. The West has stepped up pressure on Iran over its crackdown on anti-government protests, with the EU, UK and US imposing fresh sanctions on several senior Iranian officials and the Islamic Revolutionary Guard Corps . In retaliation, Iran said on Thursday that it has imposed sanctions on 34 British and European people. Ties between the West and Tehran have deteriorated in recent months as efforts to revive nuclear talks have stalled. “These [actions] cause huge political instability, which increases the risk premium of investment in Iran. Bad investment and business sentiment makes the whole economy investment-unfriendly,” says Mr Ghodsi. “There is a huge capital flight right now in Iran, although it is disconnected from the international financial system by sanctions. “People invest their savings in the most secured way, which is in foreign currencies. And that's why the currency is free falling.” Iranians currently “fear that the dollar is going to become even more expensive next week or tomorrow”, so they are dropping the local currency and buying dollars, adds Mr Vatanka. “They're buying property, buying cars, they're buying anything that's [a] tangible asset, because there's no trust … in the regime as a whole and there is no prospect for a new nuclear deal anytime soon.” This, in turn, has been pushing up the value of the dollar on the unofficial market. To deal with the situation, Iran’s central bank has been injecting dollars into the market and has also announced new policies to stabilise its currency, including raising the limits on the amount that residents can exchange in a day, the official IRNA news agency said. According to local media reports, Mr Farzin said this week that $300 million of funds previously frozen in Iraq have now been made available. The country has also started offering gold coins on the stock market and introduced a system for fixed exchange rates. However, Iran is attempting to use tactical economic tools, such as changing the central bank governor, arresting currency traders and reforming the processes for allocating forex for importers to address structural and political problems — so it is “no surprise” that the rial remains volatile, says Mr Rome. “Persistent budget deficits, the failure to revive the nuclear agreement, intensifying western sanctions and continued economic mismanagement and corruption are the key drivers of turmoil in the foreign exchange markets,” he says. “The fundamental issues are political — everything else is a band-aid.” The rial's devaluation against the dollar is not new: It was 332,000 rials to the dollar on the unofficial market in June last year, 170,000 rials in May 2020, 50,860 rials in March 2018 and 70 rials in 1978, right before the Islamic clerical regime took control. But the only solution to stem the decline, according to analysts, is for the country to adopt political reforms to support its economy, which is also struggling with inflation of more than 50 per cent. “The Iranian economy faces profound challenges, as inflation eats away at standards of living and the deep freeze in diplomacy with the West means there is no light at the end of the tunnel, at least anytime soon,” says Mr Rome. In its latest forecast, the World Bank cut its economic growth forecast for Iran for 2023 by 0.5 percentage points to 2.2 per cent, “on account of slower growth in key trading partners and new export competition from discounted Russian oil”. Growth is projected to slow further to 1.9 per cent in 2024, the report said. “Iran has significant potential for economic growth in the long term,” says Mr Farzanegan. “Rich in natural and human resources, with a large domestic market, and a sizeable middle class, developed infrastructure, a significant share of urban population, and a considerable working-age population are just a few reasons for a positive perspective for Iran's development in the long term. “If the country manages to return to rationality in domestic and international politics and establishes a normal relationship with other regional players, in addition to working to address governance deficits, then the future is bright. “However, if current politics continue, we will experience a further decrease in opportunity costs of internal conflict, growing numbers of protests and instabilities.”

Iran looks for options as the rial tanks and a foreign currency crunch bites

The country is using alternatives including cryptocurrencies to enable international trade